Credit Terminology - What Does APR Mean?

APR (Annual Percentage Rate) financing is a common term in car dealer or car manufacturer advertisements. Although APR is a commonly used term in the industry, not all consumers know exactly what APR is. Like any sort of interest rate, the lower the rate, the more favorable it is for the consumer, but do you really know what you're paying for when you get a low or high APR rate?

APR differs from a simple interest rate because a standard interest rate only contains the amount that must be paid to the lender in addition to the principal (the amount of the loan). Unfortunately, there are a hidden costs not represented by the interest rate that are included in the APR. These hidden costs can range from closing costs, to financing fees, to insurance requirements. The APR combines all of these extra costs with the interest rate into one simple rate.

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It is essential for the consumer to understand what APR is because it is required by federal law so that consumers have a standard rate for comparison. Congress enacted this legislation through the Truth-in-Lending Act in order to aid the consumers and simplify the car buying experience.

Now before you jump at the first low APR that you see on TV, you must understand that many advertised rates are subject to a credit check. The dealers use these credit checks to weed out all but the highest rated customers.

Consumers must understand the use of APR through the lenders and dealerships' eyes. For them, money repaid in a shorter period carries less risk. Since that situation carries less risk, there will be a lower interest rate to attract more buyers. Make sure to keep this information in mind as you move from dealer to dealer in your car search.

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